MuniLand

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Lately a lot of big waves have washed over muniland. The national economy has slowed; the 2009 federal stimulus program to the states has ended; there have been loud headlines about bankruptcy cases in Jefferson County, Alabama and Central Falls, Rhode Island; and Standard & Poor’s downgraded the debt of the United States with potential effects on the borrowing ability of states and municipalities. It’s a laundry list of woes.

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Here is a brilliant map from the Tax Foundation (via WPRI.com). The percentages on the map indicate the amount of each state’s annual budget that goes to pay off interest on their debt. Massachusetts leads the pack in this statistic with 9.58% of their budget going towards interest payments, much higher than the average. It’s important to note that this is not a map of relative ranking of debt loads as that would look quite a bit different and have California in the lead.

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It’s a little frustrating to hear commentators outside of muniland bash all municipal bonds as though they were a homogenous asset class. AOL’s Daily Finance ran a quote from the top regulator at the Municipal Securities Rulemaking Board, who is pushing back on this idea:

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As investors left the equity markets today, they moved into the fixed-income markets. The benchmark for bonds, the 10-year U.S. Treasury, had sharp gains and is now trading at 2.40 percent. The muniland equivalent benchmark, the 10-year AAA muni, ended at a slightly lower yield of 2.38 percent. (Remember the muni AAA has lovely tax advantages that push its yield much higher. Consult your accountant).

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Howard Cure, director of municipal research at Evercore Wealth Management, is asked in this Bloomberg video if Jefferson County, AL and Central Falls, RI are leading indicators of massive defaults in the municipal bond markets. He thinks not. After all, he says, these problems have been known for years. For Cure, the real focus should be on what he calls the “three H’s:” hospitals, higher education and housing. These entities are often heavily reliant on federal funds, which may be reduced in deficit negotiations. Muniland agrees and reminds everyone that there are vast differences in the fiscal and financial strengths of issuers.

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Something doesn’t seem right in Central Falls, the Rhode Island city that declared municipal bankruptcy yesterday. Now that the state receiver has filed Chapter 9, all the town’s dirty laundry has been hung out in public, and, like any bankruptcy, it’s not pretty. Overspending and declining tax revenues doomed this poor town, along with liberal doses of alleged corruption.

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There are many financial linkages between various levels of government in muniland but everyone eventually has to stand on their own. It’s like the cousin you grew up with but don’t see much now other than holidays. When your cousin loses their job and their mortgage is being foreclosed you want to help but in a limited way. You want the cousin to get a job and cut a deal on their mortgage or do a short sale. You don’t want them moving into your home or having access to your bank account. It’s the same between the federal, state and local governments. They are cousins. But not that close.

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Illinois has massive problems: the state has more liabilities than assets, and the credit-default swap market says they are the number one state at risk for default (see chart above). The Bond Buyer ran an excellent story on how the liabilities of Illinois are rapidly increasing:

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Meredith Whitney has made a reputation for herself in muniland as an analyst that came from the equity markets to predict an impending municipal bond cataclysm. Municipal bond experts were flabbergasted at the enormity of Whitney’s call, as well as the lack of data she had to back it up. Her bark ended up being many times worse than her bite, and now my antennae are on high alert for analysts who come out of nowhere and make big, unfounded calls.

# Editors & Key Contributors

Author Profile

I’m Cate Long and I write about the retail fixed income markets including municipal bonds. My primary interest is creating tools and systems to help retail investors understand bond markets. I’ve worked for a number of years with industry standards organizations, regulators and Congress to help craft a more transparent and fair framework for investors to participate in the fixed income markets. I'm a guest contributor to Reuters.com. Any opinions expressed are mine alone.